(Bloomberg) -- The yuan rallied past the 7 per dollar milestone for the first time in 16 months as investors digested a raft of measures to support the Chinese economy and the recent Federal Reserve rate cut kept the dollar on the back-foot.

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The offshore yuan rose as high as 6.9951 per dollar on Wednesday, extending a rebound of some 4% from a year-to-date low touched in July. China unleashed a blitz of policy support measures on Tuesday amid concern over its growth target including plans for a stock stabilization fund.

The currency has been rallying this quarter as expectations that the Fed will further loosen its policy after delivering a half percentage point rate cut kept the dollar near the lowest level since January. 

Yuan gains could extend if greenback weakness drives Chinese exporters to repatriate some of their large dollar holdings into the local currency. Capital flows into the country have already improved in August, as local firms registered net sales of foreign exchange at banks for the first time in 14 months.

Fixing Watch

PBOC stance toward the yuan has come back into focus after sentiment toward the currency swung from intense bearishness to rapid gains. While the improved sentiment in China that followed a swathe of measures announced Tuesday would be welcomed by authorities, they are also likely to be on guard for signs of excessive currency gains that could undermine competitiveness of the nation’s exports.

The PBOC’s yuan reference rate on Wednesday indicated its neutral stance on the currency, at least for now. The so called fixing was set at 7.0202 per dollar versus estimates of 7.0206 in a Bloomberg survey of traders and analysts.

“The authorities are not seeking to push back against the recent yuan appreciation,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. They are “giving the green light for further currency gains,” he said. 

PBOC Resistance

Still the threat of PBOC push back looms as Governor Pan Gongsheng said on Tuesday that China will prevent the building of one-sided expectations in the foreign exchange market and avoid overshoot risks in yuan’s rate. He also reiterated that the yuan’s exchange rate has solid foundation to stay basically stable.

The PBOC has several tools to slow yuan’s rally, according to ANZ’s Khoon. It could reduce the risk reserve ratio for currency forward transactions to 0% from the current 20%, or increase the reserve requirement ratio for banks’ foreign currency deposits, he said.

The onshore yuan stopped short of the 7 per dollar mark as it rose as high as 7.0012 on Wednesday. The PBOC also lowered the interest rate charged on its one-year policy loans while net withdrawing liquidity via the lending facility.

Yuan gains may not look sustainable past 7 per dollar before China data and the property market shows meaningful improvement, said Ken Cheung, chief Asian FX strategist at Mizuho Bank. “While the PBOC is aware of one-way yuan appreciation risk according to governor Pan’s comments, that means measures to cool off yuan appreciation bias are ready if necessary.”

--With assistance from Iris Ouyang.

(Updates with PBOC fixing in 6th paragraph.)

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